Pension reform: Will LA make 401(k)s a trend?

UPDATE: Riordan dropped his initiative less than a month after beginning the signature drive, saying he could not meet the deadline for gathering enough signatures to put the measure on the ballot.

Signature gathering began last week for an initiative to switch new hires of California’s largest city from pensions to a 401(k)-style plan, a change begun in the second largest city, San Diego, after voters approved a similar initiative in June.

Former Los Angeles Mayor Richard Riordan, who has warned the city is sliding toward bankruptcy, is pushing the initiative. He does not think costs will be controlled by the recent approval of lower pensions for most new hires, except police and firefighters.

Many private-sector employers have switched to 401(k) individual investment plans: a fixed annual payment that avoids long-term pension debt. But investment risk is shifted to employees, critics say, and a 401(k) often provides an inadequate retirement.

A spread of the anti-pension trend to government is feared by public employee unions and other supporters of public pensions. A 401(k) initiative on the Los Angeles ballot next May would trigger a costly battle and draw national attention.

A large number of voter signatures must be gathered in a short period to put the initiative on the ballot next spring. The target is about 247,000 signatures, 15 percent of registered voters, to be submitted Dec. 28, said John Schwada, campaign spokesman.

He said a signature-gathering firm “hit the streets” after the initiative title and summary was issued last Tuesday. The initiative has a “growing coalition of supporters” that includes community and business leaders.

As in San Diego, a 401(k) initiative in Los Angeles could face opposition at every step. Signature gatherers posted outside stores in San Diego were picketed by the opposition, which urged voters not to sign the petition.

The San Diego initiative drew repeated legal challenges from a state labor board and a legislative reaction. Because of the different circumstances, opposition to a Los Angeles initiative would probably take a different form.

The Public Employment Relations Board said the main sponsors of the San Diego initiative, Mayor Jerry Sanders and two councilmen, illegally bypassed required bargaining with union. The sponsors said they acted as citizens, not elected officials.

The board lost three attempts to get the courts to block the initiative: first the vote, then implementation after 66 percent of voters approved the initiative, and finally a hiring freeze imposed by the city until a temporary 401(k) plan could be negotiated.

A board administrative law judge held a hearing on blocking or overturning the initiative in July but has not issued a decision. The city lost an attempt to bypass the board hearing process and go directly to the court of appeal.

A bill signed in September, AB 1248, requires San Diego to give all employees not covered by a pension Social Security. In 1981, city employees voted to drop out of Social Security in exchange for a city promise of pensions and retiree health care.

It’s not clear how the initiative cap on employer contributions to the 401(k)-style plan (9.2 percent for most workers and 11 percent for firefighters and others) would be reconciled with the current Social Security employer contribution, 6.2 percent of pay.

The state’s biggest cities, which operate their own independent retirement systems, have some of the biggest pension problems. Personnel costs are their main expense, particularly for police and firefighters.

San Diego and the third largest city, San Jose, are spending about 20 percent of their general funds on retirement costs. Pension and retiree health care costs in Los Angeles have been projected to reach 20 percent in two years and keep growing.

Recent pension reform legislation covers the California Public Employees Retirement System (1,573 local governments), California State Teachers Retirement System and 20 county systems, but not big cities and the University of California plan.

A San Jose pension reform, approved by 69 percent of voters last June, also has stiff union opposition. An appeals court panel briefly blocked ballot printing because of a lawsuit contending the pension ballot question was not neutral.

The measure was placed on the ballot by a thin city council majority led by Mayor Chuck Reed. Unions are spending heavily to unseat one of his supporters, Councilwoman Rose Herrera, in the election Tuesday.

The San Jose measure gives new hires a lower pension, not a 401(k)-style plan. A key part of the reform is intended to provide immediate savings by reducing the cost of pensions earned by current workers in the future.

But the U.S. Internal Revenue Service has not approved the plan to give current workers the option of a lower pension for future service or paying more to continue earning their present pension amount.

Orange County negotiated a similar option with employees three years ago and still awaits IRS approval or rejection. Reed and others have said unions are lobbying against approval of the option.

A half dozen unions have filed lawsuits against the San Jose measure. Court rulings are widely believed to mean pensions promised on the date of hire are “vested” rights, protected by contract law, that can’t be cut without providing an equal benefit.

Reed thinks the San Jose charter specifically authorizes pension changes. Getting significant employer savings from reducing or eliminating pensions for new hires could take decades.

The San Diego initiative aims to get savings more quickly by directing the city to take the initial position in labor bargaining of freezing the pay on which pensions are based until 2018. A two-thirds vote of the city council can override the position.

The proposed Los Angeles 401(k) initiative would get early savings in ways roughly similar to the equal employer-employee contributions called for in the recent reform legislation, AB 304, and the San Diego freeze on pensionable pay:

1) Current employees would contribute an amount equal or greater than the city contribution to pensions and retiree health care. It’s not clear from the title and summary whether this split, as in AB 340, is for “normal” costs, not the debt or unfunded liability.

2) Pay increases would be excluded from the base pay amount used to calculate retirement benefits if the city pension contribution exceeds 15 percent of pay for most workers and 25 percent of pay for police and firefighters.

In a reform of city pension boards similar to a San Jose action, the initiative would add two mayoral appointees to boards now dominated by employee representatives and require some appointees to have financial, accounting or investment expertise.

Similar to the San Diego plan, the Los Angeles initiative would limit city contributions to the 401(k)-style plan for new hires to 10 percent of pay for most employees and 12.5 percent of pay for police and firefighters.

Would Los Angeles voters join San Diegans in giving new city hires a 401(k)-style plan? Only the pollsters may have a clue. Los Angeles is a public employee union stronghold, the power base for several recent state Assembly speakers.

San Diego is an exception, suffering years of soaring pension costs after infamous deals raised pensions and lowered city pension contributions in 1996 and 2002. Mayor Reed in San Jose spent about five years laying the groundwork for pension reform.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 5 Nov 12

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7 Responses to “Pension reform: Will LA make 401(k)s a trend?”

(1) Freeze the current DB Plans for FUTURE service of current workers…. and replace with DC plans with a modest Taxpayers “match” of 2-4% of pay. That + SS is what Private Sector workers typically get and Public Sector workers are NOT “special” and deserving of a better deal on the Taxpayers’ dime.
(2) Taxes are already high enough. Reduce ALREADY ACCRUED pensions for Past service to the level supportable by CURRENT Taxes and no more … even a 50% reduction would leave them with better pensions than 90% of Private Sector workers.

The Municipal Employees Association filed a complaint claiming that Mayor Sanders was acting as an “agent of the city” by circumventing laws governing public negotiations and passing the law as a ballot initiative. The mayor, however, was simply exercising his First Amendment right to free speech by supporting an initiative which curbed public pension-related expenses and improved the city’s fiscal situation. In Sanders’ own words, “you certainly don’t give up your First Amendment rights” as mayor.

I’ve said it before and I’ll say it again. If you want to give me private sector benefits, give me a private sector salary. Since I left the private sector to work for government, I’ve given up nearly $300000 in salary. I would prefer cash but will take a cashier’s check or money order.

Of course, private sector pension funds were drained in the 1980’s (and later) by corporate raiders, like Ivan Boesky. Reasonable pensions in the private sector were devoured by the wolves of Wall Street, which is not a good thing.

Putting the 2-4%/year in a well-managed DB plan (I’ve given lists of many in the Country, both public and private) would give about 2X the benefits as keeping that money in a DC plan.

No doubt, the public sector pension system needs massive reform. Many of the current benefit formulas used, even if they could be afforded, are unjustifiable under any stretch of logic, but many of the problems (and I won’t list them all here because this would be an even longer response) with DB are fixable.

That said, this is an area where the private sector model is not what we should be striving for. What the private sector is calling pension savings from closing their DB plans, I call a shift of unfunded liability from the corporations to the individual taxpayers in the form of future government benefits that will have to provided to all of those who retire with a woefully underfunded 401k.

If DC only is ever going to work it needs just as much reform as DB plans. Even with that reform, unless you take away individual choice, I don’t see how you ever get around insufficient contributions, poor investment returns, and higher expenses.

DB or DC the math is the same: Investment Returns + Contributions = Benefits + Expenses. DC as it stands has lower investment returns and higher expenses, which means if you design a DB model that provides a similar desired outcome to whatever your goal is with DC, then you should be able to accomplish that at a lower contribution rate (whether paid for by the employer and/or the employee).

So while I agree changes need made to DB, let’s not fool ourselves into thinking that we have solved the problem with DC only. The bill for the DC only retirees is coming due soon and it only continues the trend we seem to continuously follow these days, namely kick the bill down to the next generation so we don’t have to pay for our own poor policies.